A recent survey of small businesses reported that 23 percent had lines of credit, 7 percent had financial leases, 14 percent had mortgage loans, 12 percent had equipment loans, and 25 percent had vehicle loans. When considering funding your consulting service, you have many options besides self-funding.

Loan Qualification

The ability to get a loan when you need it is as necessary to the operation of your business as having the right equipment. Before a bank or any other lending agency will lend you money, the loan officer must feel satisfied with the answers to these five questions:

• What sort of person are you, the prospective borrower? In most cases, the character of the borrower comes first. Next is your ability to manage your business.

• What are you going to do with the money? The answer to this question will determine the type of loan and the duration.

• When and how do you plan to pay it back? Your lender's judgment of your business ability and the type of loan will be a deciding factor in the answer to this question.

• Is the cushion in the loan large enough? In other words, does the amount requested make suitable allowance for unexpected developments? The lender decides this question on the basis of your financial statement, which sets forth the condition of your business, and on the collateral pledged.

• What's the outlook for business in general and for your business in particular?

When you set out to borrow money for your firm, it is important to know the kind of money you need from a bank or other lending institution. Let's discuss loans and other types of credit.

Loan Types

There are numerous types of loans available, all with their own unique name depending on the lender.

Signature Loan

A signature loan holds nothing in collateral except your promise to pay the lender back on terms with which you both agree. If your monetary needs are small, you only need the loan for a short time, your credit rating is excellent, and you're willing to pay a premium interest rate because you're not using physical collateral, a signature or character loan is an easy way to borrow money in a hurry.

Credit Cards

Many a small business has found at least some of its funding in the owner's personal credit card. Computers, printers, books, office supplies, office overhead, and other costs can be covered with your personal credit card. However, interest rates on credit cards are extremely high — sometimes double what you might pay on a collateral loan. But credit cards can offer you quick cash when you need it. If this is an option for you, talk to your credit card representative about raising your credit limit. Keep in mind that it will be much easier to do so while you're employed by someone else.

Line of Credit

A line of credit is similar to a loan except you don't borrow the money all at once. You get a credit limit, say $100,000, that you can tap any time you need money for business purposes. The most common is the revolving line of credit that you can draw from when business is off and pay back when business is good, providing you don't exceed your limit. A line of credit is an excellent way for a consulting service to work through the ups and downs of seasonal business. With some restrictions, a line of credit can be established using a portion of your home equity as collateral. Using a secured equity earns you a lower interest rate.

Cosigner Loan

A cosigner loan should be one of the most popular loans for small businesses, but many business people never consider it. Simply, you find a cosigner or a co-maker with good credit or assets who will guarantee the loan with you. If you have a potential investor who believes in your business but doesn't want to put up the cash you need, ask her to cosign for a loan with you. Your chances of getting the loan are much better. Some cosigners will require that you pay them a fee of 1 to 4 percent of the balance or a flat fee; others will do it out of friendship or the hope of future business from you. In any case, consider this as an excellent source of capital for your new consulting service.

Equipment Leases

If you're purchasing equipment, computers, or other assets for your business, the supplier may loan or lease the equipment to you. This often requires about 25 percent down, so be ready to come up with some cash of your own.

Collateral Loan

A collateral loan is one in which some type of asset is put up as collateral; if you don't make payments you will lose the asset. The lender wants to make sure the value of the asset exceeds that of the loan and will usually lend 50 to 75 percent of asset value. A new consulting service owner often does not have sufficient collateral — real estate or equipment — to secure a collateral loan unless an owner uses personal assets such as a home.

Passbook Loan

Sometimes you can get a loan by assigning a savings account to the bank. In such cases, the bank gets an assignment from you and keeps your passbook. If you assign an account in another bank as collateral, the lending bank asks the other bank to mark its records to show that the account is held as collateral.

Life Insurance Loan

Another kind of collateral is life insurance. Banks will lend up to the cash value of a life insurance policy. You have to assign the policy to the bank. If the policy is on the life of an executive of a small corporation, corporate resolutions must be made authorizing the assignment. Most insurance companies allow you to sign the policy back to the original beneficiary when the assignment to the bank ends. Some people like to use life insurance as collateral rather than borrow directly from insurance companies. One reason is that a bank loan is often more convenient to get and may often carry a lower interest rate.